The Insurance Problem Solver wants to help you better understand them. But remember, I am not a financial advisor so I cannot recommend whether an annuity is right for you, much less what kind or which one.
What Is An Annuity?
An annuity is a financial product issued by an insurance company. Therefore, it is “risk-bearing.” That means that it promises future payment in return for current dollars. Specifically, the insurance company promises to make a series of payments in the future in return for you paying a premium now. In some cases, the premium can be paid in several installments.
In the sense that annuities are risk-bearing financial products, they are similar to insurance. They are issued by insurance companies and frequently sold by insurance agents. Some have higher internal costs associated with them than others (sort of like whole life insurance vs. term life insurance). In considering one, it is important to assess the financial stability of the insurance company that is issuing it, and in making the decision about buying one, professional advice is a must. Just like with insurance. That’s about where the similarity ends.
As we have discussed in other articles, insurance promises to provide protection. Annuities promise an income stream. Those are not the same and cannot be substituted for each other.
Another big differences between an annuity and insurance is that an annuity does not require a specific, fortuitous event to occur, like death or a car accident, to trigger payment. A “fortuitous” event is insurance lingo for one that occurs by chance. In contrast, the trigger for payment by an annuity is the attainment of a stated age, the passage of a period of time, or, in one type, when you tell the insurance company to start paying. The “time” triggers will occur no matter what, and with the “start payments now” type, you have control over when payments will begin. Therefore, nothing is left to chance, unlike the fortuitous event trigger that characterizes insurance.
When you understand the difference between insurance and annuities, then you can better insulate and secure your future.
I am always here to help you with the insurance hotbed, as I’m a retired insurance attorney from Tallahassee. Please reach me, and we can discuss your situation.